U.S. Senate Told To Raise Beer Taxes

As reported by Harry Schumacher in his Beer Business Daily (subscription required), at a Senate Finance Committee round table on Tuesday, three of the thirteen people called on to testify about how to pay for Obama’s $1.5 trillion universal health case initiative suggested that the excise tax on beer should be increased by between 50% and 400%. They also suggested — finally — that excise taxes be applied to soda pop (although I think perhaps it should be anything with high fructose corn syrup) among much else, such as trans fat and sodium levels in packaged and restaurant foods (though why not remove all the sugar in packaged foods, too?). Even though I disagree with the concept of excise taxes, at least people are finally suggesting taxing products which in my opinion are more harmful to society as a whole than alcohol.

Because alcohol beverages are a “major cause of illness, addiction, death, injury, and psychosocial problems, Congress should raise alcohol excise taxes, tax all products equally on the basis of their alcohol content, and index tax rates for inflation. Boosting the tax on distilled spirits by 50 percent and equalizing the beer and wine rates would generate $12 billion in new revenues annually. Simply adjusting tax rates for the inflation that has eroded revenues since the last increase (in 1991) would raise $5 billion in new revenues per year. Higher taxes and prices would dampen alcohol consumption and lead to additional health-care and other cost savings to the federal government and to the economy generally.”

Jacobson’s arguments are typical of modern prohibitionists, full of scary statistics that prove to be wrong or inflated at best, propaganda, and selective reasoning (when they’re reasoning at all). When he says that “[h]igher taxes and prices would dampen alcohol consumption” does he not get that it would reduce the tax benefits, as well? Putting an entire industry out of business removes personal income tax, business tax and wipes out the excise taxes completely. And that helps raise more revenue how? And then of course there’s the numbers. Even if we accept his $12 billion in new revenues figure, that means his idea of burdening an entire industry would raise 0.008% of the $1.5 trillion total needed to fund the President’s health care initiative. It’s kind of ironic that’s it’s point-0-0-8 percent. Now how rational a suggestion is that? Let’s kill an industry that’s actually keeping people employed to raise a tiny fraction of the money needed.

But one of his arguments is especially laced with error and a false conclusion. Here’s the argument:

Some parties (usually industry) express concern about the regressivity of alcohol taxes, but the actual problem is much exaggerated. In fact, compared to upper-income consumers, lower income families buy much less alcoholic beverages. People in the lowest quintile of incomes consume only 8 percent of alcoholic beverages; those in the top quintile consume 38 percent. Overall, only 1 percent of Americans’ total expenditures are for alcohol, regardless of income. Most people would be little affected by higher alcohol taxes. More than one-third of adults do not drink at all, and half of all drinkers drink sparingly. For instance, using the highest-increase scenario discussed above, half of all beer drinkers would pay less than $10 per year—under three cents a day—in new taxes. Because alcohol consumption is heavily concentrated among the top 20 percent of drinkers who consume 85 percent of all the alcohol, most of the tax increases would be paid by those who drink excessively. Using some of the revenues for alcoholism treatment, prevention, and public education would further reduce the toll of alcohol problems and would probably disproportionately benefit low-income problem drinkers.

Is it at all surprising that the top 20% (which is a “quintile”) income households (who have lots more money) buy a disproportionally larger amount of alcohol? I suspect they also buy a higher percentage of food, soda, and every other conceivable consumer product or service too. The bottom 20%, with far fewer resources can’t afford to buy as much. So WTF? That somehow makes it fair because people with more money can afford to buy more and thus can pay higher prices? And that also somehow means it’s not regressive after all? What a nutter. The lower income bracket would also be more burdened since they’re already heavily burdened by virtue of their limited buying power. They could only afford less, but that’s not regressive?

And why is it okay if “most of the tax increases would be paid by those who drink excessively?” Why punish people who choose to drink more? It’s people like Jacobson that actually make me want to drink more. But what that tacitly means is that he’s characterizing the tax in moral terms as a sin tax. He’s suggesting, not very subtly, that people who drink more deserve to be punished. And see here I thought the point of the discussion was to fund health care for all Americans, not target certain ones that the CSPI disagrees with and punish them.

And then there’s the tired argument that the higher taxes could fund “alcoholism treatment, prevention, and public education” which further reduces the amount available for the initiative. Just suggesting that funds be diverted for such specific programs makes clear in my mind that he doesn’t really understand why the Senate asked for his testimony.

After pointing out that alcohol taxes are lower today than when they were last raised in 1991 due to inflation, he recommends one of three options, each worse than the one before:

The first option would be to raise tax rates back to where Congress set them in 1990 — i.e., to put them at the 1991 level, but adjusted for inflation since that time. Under this option, taxes would increase by nearly a buck a case, to $2.16 a case in federal taxes alone.

Behind door number two is an option that is apparently put forward by the Congressional Budget Office, which is to set alcohol taxes at a uniform $16 per proof gallon, which means equalizing beer, wine, and spirits taxes. The current tax on spirits is $13.50 proof per gallon. This CBO option would raise that to $16 per proof gallon and also apply it to beer and wine. This would nearly triple the federal excise tax on beer, raising it by $2.16 a case, for a total federal tax of $3.36 per case, while simultaneously increasing spirits taxes by a lesser multiple.

The final option Dr. Greenstein proposes, which almost makes me sick to even write about, would be to combine the first two options in a sort of alcohol Armageddon. Under such an approach, alcohol would be taxed across the board at the level that distilled spirits were taxed in 1991, when Congress last acted, with that level adjusted for inflation since 1991 and going forward. Under this option, the tax on a case of beer would quadruple to about $4.32 a case.

First let’s address the inflation argument. If that’s true, then isn’t practically every thing in the world cheaper now due to inflation, isn’t every unadjusted tax in the same situation? And if so, then why aren’t we talking about adjusting all taxes for inflation? Why are we only talking about alcohol?

He acknowledges that “moderate alcohol consumption can be neutral or even beneficial for health,” but seems to believe that it’s still acceptable to punish all alcohol consumers because of the supposed high costs imposed by “excess alcohol consumption.” Even if true, why is this an acceptable line of reasoning, that everyone should be punished for the excesses of a small minority? How did we get to a point in our social evolution where that seems like a good idea?

He goes on to cite the similarly spurious arguments that “the National Academy of Sciences has recommended raising alcohol excise tax rates to discourage underage drinking” and “a 2007 report issued by the Surgeon General noted that increasing the costs of alcohol use (i.e., raising the tax on alcohol) could influence teenagers to drink less.” How does anyone read that and not see the flawed logic? Not only is that not what he was asked to testify about, but we should raise taxes (and prices) on all alcohol because it “could” make people who are already forbidden from drinking it consume less? That just makes no earthly sense whatsoever.

Then there’s the idea of making taxes on alcohol uniform — a kind of “flat tax” — by proof per gallon. Forget all the math, this simply ignores the costs of making the very different alcoholic beverages, their pricing and how they’re consumed. Spirits, of course, cost much more than beer and wine is likewise often much more expensive then beer, too. While both could conceivably withstand a tax increase because of the higher price they command in the marketplace, beer would be absolutely decimated by such a taxing structure.

He concludes with more nonsense about moderate drinkers not being unduly burdened since they drink less already. That therefore the increased taxes would mean the price of their alcohol would only rise a little bit, ignoring, of course, the reality that if the taxes on a glass of wine increased 10 cents that the price would not go up merely 10 cents, too, but by far more. This is the same argument that Jacobson made, just in a slightly different form, and its just as ridiculous an argument here, too.

The third person to bring up alcohol was Jonathan Gruber, a Professor of Economics at M.I.T.

Sin Taxes: The second is increased taxation of “sin good” whose use raises the cost of health care for all Americans. This would include cigarettes, alcohol, and high sugar or fat foods that cause obesity. There is a strong public policy argument for raising taxes on all of these goods. In particular, the tax rate on alcohol is well below the level that would account for the damage that drinking does to society, in particular through drunk driving. Yet it is difficult to raise sufficient revenues from these sources, and these revenues will not rise at the rate of health care spending; indeed, they are likely to fall over time if we move the population towards healthier lifestyles.

Gruber at least concedes that raising these taxes would not only raise very little money but that the amount would decrease over time, as well. So you have to wonder why he brought it up at all. What I find perhaps most troubling is that he refers to taxing these particular items as “sin taxes.” That just seems like such antiquated thinking. I don’t think an economics professor gets to decide what is and isn’t a sin. He may consider alcohol to be a sin, but millions of other Americans believe it’s perfectly acceptable to drink an alcoholic beverage. And both positions are equally valid because deciding what’s a sin is a personal decision based on one’s religion or moral compass, which still was — last time I checked — a freedom we all enjoy as citizens of the United States thanks to the Bill of Rights. So I think Gruber is more than a little presumptuous when he tries to decide what’s a sin for all Americans.

Here’s Harry’s take on the whole proceedings:

It’s clear that these and other groups’ alcohol tax agenda — which they’ve been peddling for years — is only gaining an audience now with the powers in Washington because the federal treasury is in desperate need of funds. It’s clear to me that they are presenting more public policy arguments than fund raising. After, even the most draconian measure above only raises about $30 billion over five years, and that’s if consumption doesn’t fall off a cliff (which we know it does when looking back at the 1990 doubling of taxes). That’s a fraction of the trillions needed to fund this program. Plus it’s a highly regressive tax, and the resulting job losses will reduce income tax revenue, something I’m quite sure is not figured into their numbers. Jonathan Gruber, PhD, professor of economics at MIT pointed out the paradox of it to the good senators in attendance: “It is difficult to raise sufficient revenues from these sources, and these revenues will not rise at the rate of health care spending; indeed, they are likely to fall over time if we move the population towards healthier lifestyles.” In other words, higher taxes reduces consumption, which in turn reduces taxes. Not a great business model, even for the government.

We must keep this all in perspective. This was only a round table (not even a formal hearing) of a bunch of propellerheads with letters behind their names, policy wonks who’ve never run a small business or had to scrounge to make payroll (I mean that with the utmost respect, of course). We knew what they were going to say before the said it. Having said that, it’s clear this isn’t going away because of the desperate money grab going on in Washington right now. Now we must band together and fight this the smart way. If you haven’t had your senator or congressman to your brewery or distributorship lately, this summer break is the perfect time.

Harry’s right, of course, about keeping this in perspective. I guess I should be pleased that only three of the thirteen targeted alcohol. But I’m also quite worried that we’re seeing only the tip of the iceberg in a more concerted effort by neo-prohibitionist groups like the CSPI, and others, to use our present economic crisis to their advantage to further an unrelated agenda. The number one priority of most, if not all, politicians is to stay in office. Using alcohol as a bogeyman can be an attractive alternative from having to face the real causes and consequences of our current economic situation. As a result, I feel quite confident in saying this is not the last time we’ll find alcohol squarely in the crosshairs. At this point as the economy continues its downward slide, the politicians and the New Drys whispering in their ear about demon alcohol will continue to find common ground to the potential detriment of the millions of Americans who enjoy a drink now and again, not to mention the millions more whose livelihood depends on alcohol to feed their own families and pay their taxes. It shouldn’t be an us vs. them world, but it sure seems increasingly that way.

Portions from Beer Business Daily reprinted with permission. If you don’t already subscribe, and beer is your business, you should consider subscribing to Harry’s daily (and sometimes more frequent) e-mail newsletter.

Comments

wow…. 12 Billion used to seem like such a BIG number to me. but put it in perspective. that much money is burned in by the Iraq War in just 6 weeks. or another way to look at it is that “craft beer” which employees roughly 20,000 people is estimated to have revenues of around 7 billion in 2009.

Excellent breakdown of the neoprohibitionist agenda. I predict the alcohol excise will pass, while the tax on sugary bevs and foods will ultimately fail. We can’t possibly expect people to pay extra for Trix and Cocoa Puffs!

If drunk driving is the issue, and tax policy is how we seek to address it, then why tax drinking when it’s the DRIVING that is the problem?! Sober drivers often kill people, too, while non-driving drunks rarely kill or injure anyone but perhaps themselves.

And when are we going to wake up to the fact that our health-care problem is not one of too little spending? We Americans already pay through the nose for health care, far more collectively than our peers around the world (e.g., Canada, France, Cuba). The problem instead is that our health-care system is too expensive. How ironic that we want to discourage use of one of the most benign and harmless chemicals human beings have ever known–alcohol–in the name of being able to afford even more of the extremely scary chemicals that our modern health-care system instead over-prescribes.

People don’t you understand what our government is doing? They are not going to stop at Tobacco Taxes and Alcohol taxes. They will go after something else to get their money.

Have any of you read the Health Care Plan they voted in? In NY and NJ a family of 4 can make $85,000.00 a year and qualify for FREE health care for their children. This health care package was extended to every LEGAL immigrant minor children as soon as they arrive in the US.

I am a small business owner that sells many fine craft beers. The Craft beer companies are small but add all of them up and they in terms of employment out number Wal-Mart in the entire world. Jobs will be lost, small businesses that employ millions of people throughout the United States will close because when they begin to tax the very items that we survive on and the customers can no longer afford them, we have to close our doors. Don’t even get me started on the BAILOUT! The government has turned their backs once again on the Small Business of the Country. This is sad…

Well at least maybe once all of these employees hit the unemployment line we will then qualify for the very thing that cost us our jobs..FREE medical insurance for our children.

Wonderfully articulated article as usual J. As you note this topic is being addressed much more regularly as of late. Luckily a bill was just vetoed in my state of Minnesota that included a 144% increase in excise tax per barrel of beer, but unfortunately there is no question its supporters will try again. It simply amazes me how much we allow social policy to slip into these discussions about a merely fiscal thing (not to downplay the impact these decisions have on people who work in the industry) as well as the serious disconnect I see with lobbyists & politicians being completely oblivious of what the people they are tasked with representing actually care about and effect their lives. Mr Gruber speaks about some of the problems associated with alcohol consumption, drunk driving in particular. If these people actually care in any way shape or form about peoples health how about changing the way we think about alcohol in our society, teach people to drink responsibly from a young age and do things like creating better public transport infrastructure to encourage people to make safe decisions (or perhaps punish DUI drivers even further if vengeance is what they really want). Wrecking a prosperous, homegrown industry in a time of economic uncertainty is unbelievably foolish, particularly when they can not even make an honest argument. Cheers!